Accounting for Fixed Assets, Natural Resources, and Intangible Assets Part II

Introduction

This tutorial provides a comprehensive guide to understanding the accounting for fixed assets, natural resources, and intangible assets. It serves as an extension of basic accounting principles, specifically focusing on how to properly account for the release of fixed assets, the valuation of natural resources, and the treatment of intangible assets. This knowledge is essential for accounting professionals and students looking to deepen their understanding of asset management within a business context.

Step 1: Understanding Fixed Assets

Fixed assets are long-term tangible assets that a company uses in its operations. To account for fixed assets effectively:

• Identify Fixed Assets: Recognize assets such as machinery, buildings, and vehicles.
• Determine the Cost: Include all costs necessary to acquire and prepare the asset for use, such as purchase price, taxes, and installation costs.
• Depreciation: Allocate the cost of the asset over its useful life. Common methods include:
  • Straight-line method
  • Declining balance method
  • Units of production method

Practical Tips

• Keep accurate records of all expenses related to fixed assets.
• Review and adjust depreciation methods regularly based on asset usage.

Step 2: Accounting for Asset Disposal

When a fixed asset is no longer in use, it must be appropriately disposed of in the financial records.

• Determine the Book Value: Calculate the asset's book value by subtracting accumulated depreciation from its original cost.
• Record the Sale or Disposal: If sold, record the sale price and any gain or loss compared to the book value.
• Remove from Financial Statements: Ensure the asset is removed from the balance sheet.

Common Pitfalls

• Failing to adjust for accumulated depreciation can lead to incorrect financial reporting.
• Not documenting the disposal process thoroughly may result in issues during audits.

Step 3: Valuation of Natural Resources

Natural resources are assets like oil, minerals, and timber. Their accounting involves:

• Cost Accumulation: Track costs associated with exploration, extraction, and development.
• Depletion: Similar to depreciation, depletion is the allocation of the resource's cost over its useful life. Common methods include:
  • Cost method
  • Percentage depletion method

Real-World Applications

• Companies in industries like mining and oil extraction must apply depletion to reflect the diminishing value of natural resources accurately.

Step 4: Accounting for Intangible Assets

Intangible assets lack physical substance but hold significant value. This includes patents, trademarks, and goodwill.

• Valuation: Intangible assets should be initially recorded at their purchase price or fair value.
• Amortization: Spread the asset's cost over its useful life. This is similar to depreciation but applied to intangible assets.
• Impairment Testing: Regularly assess whether an intangible asset's carrying amount exceeds its recoverable amount, which may require an impairment loss to be recognized.

Important Considerations

• Differentiate between finite and indefinite-lived intangible assets, as their accounting treatment varies.
• Keep up-to-date with accounting standards related to intangible assets to ensure compliance.

Conclusion

Understanding the accounting for fixed assets, natural resources, and intangible assets is crucial for accurate financial reporting. Key takeaways include the importance of proper valuation, regular assessments of asset condition, and adherence to appropriate accounting standards. For further learning, consider exploring detailed accounting standards specific to your region or industry, and practice these principles in real-world scenarios to solidify your understanding.